Cure for Russia’s Slump Could Be Worse Than Disease

April 3 (Bloomberg) -- Russia’s long stretch of oil-fueled
economic growth could be coming to an end. The greater danger,
though, might be President Vladimir Putin’s plans to get it
going again.

Economists polled by Bloomberg estimate that the Russian
economy grew at an annualized rate of only 2 percent in the
first quarter of this year, less than half the pace of the same
period in 2012. Russia’s biggest industry, hydrocarbon
extraction, contracted 0.8 percent in January and 2.2 percent in
February. Growth in retail sales has slowed considerably
compared with last year, and food retail has practically stopped
expanding. Last week, Deputy Economics Minister Andrei Klepach
said he expected growth of only 3 percent for the whole of 2013,
down from a previous ministry estimate of 3.6 percent.

The slowdown is troubling for Putin, whose popularity
depends heavily on the prosperity Russia has experienced during
his time in power. In his annual message to parliament last
year, Putin said that “interests of national development
required” economic expansion of at least 5 percent to 6 percent
annually. In the same speech, he suggested a way to help reach
that goal: Invest some money from the government’s reserve funds
-- accumulated specifically to cushion the budget in times of
low oil prices -- in infrastructure projects.

Russia’s reserve funds, which held $172.3 billion as of
March 1, have long been the object of bureaucrats’ covetous
designs. Unlocking the money for government projects could mean
an enormous transfer of wealth to corrupt officials. In one
World Bank poll, about one in four companies that had bid for
government contracts in 2011 admitted to paying a bribe.

Russia has plenty of economists willing to offer an
intellectual justification for raiding the rainy-day fund. The
Russian Academy of Sciences is full of academics who earned
their doctorates in the era of central planning, and who have
been saying all along that fiscal prudence and tight money were
a Western poison concocted to bury Russia. Among the most
influential is Sergei Glazyev, whom Putin appointed as his
economic advisor in July.

Glazyev, a leftist economist who was foreign trade minister
in the 1990s but fell out with the liberal team that had
President Boris Yeltsin’s ear, has long suggested that Russia
renounce monetary restraint. In January, he authored a report
saying the central bank should sharply lower rates and start
refinancing banks that issue loans to industry and to government
“development institutions.” To Glazyev, the benefits of such
investment in “reindustrialization” far outweigh the costs of
inflation and other repercussions. He argues that, by
stockpiling cash, the Russian government is merely bailing out
the West, which prints dollars and euros irresponsibly to stave
off its imminent collapse. On Putin’s orders, he is working on
more specific proposals for speeding growth.

Last week, two Soviet-era academics -- Ruslan Grinberg, 67,
who heads the Academy of Sciences’ Institute of Economics, and
Viktor Ivanter, 77, of the Institute of Economic Forecasting --
made public their own proposals for unleashing the power of
Russia’s financial reserves. Grinberg argued that “over-accumulation of reserves is even more dangerous than a lack of
them,” maintaining that Russia had enough money now to combat
three or four crises on a 2008-2009 scale, according to the RBC
Daily newspaper. Grinberg estimated that $112 billion would be
enough of a cushion. The rest could be spent by the government
on rebuilding Russian industry. Grinberg suggested civil
aviation, while Ivanter preferred road and housing construction
and river transport.

In a sign that at least the monetary easing might become
reality, Putin nominated Elvira Nabiullina, former head of the
pro-stimulus economics ministry, to become Russia’s next
central-bank chief.

So far, the finance ministry is holding out, noting that
Russia already has a budget deficit despite the high energy
prices. The state-owned investment bank VTB Capital estimates
that the budget deficit will amount to 0.5 percent of gross
domestic product in 2013, according to the RBC news service. At
a conference held by the daily newspaper Vedomosti, Deputy
Finance Minister Alexei Moiseyev attacked the appetites of
“development” champions, saying that state-owned companies
commonly submit proposals for projects costing more than $30
billion.

“Government investment in this country necessarily means
big corruption costs and inefficiencies in assessing investment
projects,” said Valery Mironov, head of the Development Center
think tank, in an article on the Free Press website. “When money
is parked in U.S. bonds, it loses its value much more slowly
than when it falls directly into our bureaucrats’ hands.”

Economists such as Mironov are battling a rising tide.
Putin, who has always protected Russia’s reserves, seems to be
more willing to listen to the advocates of higher spending. In
his third term in power, the president is increasingly turning
back to a Soviet approach, bringing back the Hero of Labor award
and stepping up anti-Western rhetoric. Acting on the advice of
Soviet-era economists would fit the mood.

(Leonid Bershidsky, an editor and novelist, is Moscow
correspondent for World View. Opinions expressed are his own.)